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Brent Under Pressure

Takeaway: Geopolitical risk and the threat of war have people getting long oil; not fundamentals. $OIL $USO

Brent crude oil, the worldwide standard for crude, is ripping even higher today, touching $116 a barrel and not looking to stop anytime soon. Oil is up +32% since June thanks to inflation and geopolitical risk. This is great for producers of oil; bad for consumers of oil.

 

Our Energy Analyst Kevin Kaiser had a nice quote that pretty much summed up the long case for crude oil. Allow us to share:

 

Bull case for #oil is bailouts and bombs - not growth. $USO $OIL

 

 

Brent Under Pressure - sweetBRENTchart

 

 

Kaiser pretty much nails it. A lot of market participants seem to have wised up this year and noticed that supply and demand economics don’t have anything to do with oil. We’ve got plenty of oil. But the threat of Iran closing the Strait of Hormuz or unrest in the Middle East is what has everyone on the edge of their seat. With hedge funds remaining incredibly bullish on oil, fundamentals are thrown out the window. It’s a waiting game.


Brent Under Pressure

 BRENT UNDER PRESSURE

 

 

CLIENT TALKING POINTS

 

BRENT UNDER PRESSURE

Brent crude oil, the worldwide standard for crude, is ripping even higher today, touching $116 a barrel and not looking to stop anytime soon. Oil is up +32% since June thanks to inflation and geopolitical risk. This is great for producers of oil; bad for consumers of oil. Our Energy Analyst Kevin Kaiser had a nice quote that pretty much summed up the long case for crude oil. Allow us to share:

 

Bull case for #oil is bailouts and bombs - not growth. $USO $OIL

 

 

FADING AUGUST

The global macro picture at the moment is bleak and more importantly, it’s slow. What do we mean by slow? Volatility and volumes are virtually non-existent, everyone’s on vacation including the Eurocrats in the Eurozone and half of Wall Street (gotta milk that Hamptons timeshare for all it’s worth!) and no one knows what asset class they want to buy. Bonds? Stocks? Everything is essentially flat. Now that the S&P 500 is above 1400, expect it to trade in a tight range for some time.

 

Watching the market in real time is like watching an amateur ping pong game. It’s slow, uneventful and no one is keeping score.

 

 

CHINESE SLOWDOWN

Chinese growth has been slowing for the last year. People keep saying that China’s market is going to crash. Guess what – it has already crashed. Chinese equities get slaughtered on a weekly basis and the economic numbers coming out of China are painful to look at, knowing that they’re likely doctored. China’s Foreign Direct Investment (FDI) print this morning of -9% year-over-year is grim. How grim? Allow the Chinese Ministry of Commerce to lay it out for us:

 

In the second half, China’s foreign trade and export situation will be more grim, there will be more difficulties, harder tasks, and the pressure of achieving the full-year target will be bigger…”

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  DOWN

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat   

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“Moral: If you're going to steal, steal big .... and know people http://dealbook.nytimes.com/2012/08/15/no-criminal-case-is-likely-in-loss-at-mf-global/” -@HuffPeter

 

 

QUOTE OF THE DAY

“Not a shred of evidence exists in favor of the idea that life is serious.” – Brendan Gill

                   

 

STAT OF THE DAY

The number of new housing permits rose by 6.8% to annualized level of 812,000 in July - highest number since August 2008.

 

 


THE M3: LA SCALA STAMP DUTY REFUND; 2Q CONSTRUCTION AND REAL ESTATE TRANSACTION DATA

The Macau Metro Monitor, August 16, 2012

 

 

GOVERNMENT ALLOWS SPECIAL STAMP DUTY REFUND ON LA SCALA FLATS Macau News

The Financial Services Bureau (DSF) is allowing buyers of La Scala apartments to get back their special stamp duty (SSD) after announcing that it would annul the land-lease agreement with the residential project’s developer.

 

PRIVATE SECTOR CONSTRUCTION AND REAL ESTATE TRANSACTIONS FOR THE 2ND QUARTER 2012 DSEC

A total of 7,845 building units exchanged hands at a price of  MOP31.05 billion in 2Q12 as per Stamp Duty record, up by 1.2x and 1.7x,  respectively QoQ. Of those units, 5,555 were residential units selling for MOP23.39 billion, up by 1.4x and 1.8x, respectively. In 1H12, there were 11,437 building units traded hands at MOP42.76 billion, down by 43.8% and 24.4% respectively YoY. 

 

The average transaction price of all residential units amounted to MOP55,427 per square metre of usable area, up by 21.9% QoQ. The average price of those in the Macao Peninsula (MOP47,461) and Taipa (MOP66,804) increased by 15.0% and 38.9%, respectively QoQ, while the average price of those in Coloane (MOP78,197) decreased by 6.0%.

 

In 2Q, 3,531 cases of real estate sale and purchase contracts were made, up by 77.4% QoQ, and the number of units rose by 34.2% to 4,358. In addition, there were 2,631 cases of residential mortgage contracts signed, an increase of 89.6% QoQ.


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Market Slavery

This note was originally published at 8am on August 02, 2012 for Hedgeye subscribers.

“Nature has made no man a slave.”

-Alcidamas

 

What would the #OldWall’s manic media mouthpieces do without this week’s central planning events? What would we all do without the drugs that promise to suspend economic gravity? What would we wake up to this morning if markets were actually free?

 

Alcidamas was a popular Greek philosopher in 4th century BC who Victor Davis Hanson cites at the end of Chapter 8 in “The Soul of Battle.” That quote precedes an excellent chapter in human history titled “And All of Greece Became Independent and Free.”

 

It’s too bad that when we use the word free in today’s marketplace, the first thing that comes to mind is getting a sticker.

 

Back to the Global Macro Grind

 

US Stocks closed down for the 7th day in the last 9 yesterday, but no worries, we have a central plan on tap at 745AM EST that is going to whip this sucker right back up to a level where perma-bull marketers can say “but the market is up year-to-date.”

 

Everything in the land of nodding (other than where the entire street gets paid - fund flows, volumes, and performance), is just dandy right now. Buy, hold, and pray.

 

I have absolutely no idea what this conflicted and compromised central planner is going to tell us today. All I can assure you is that there’s at least -3.5% downside in the EuroStoxx50 and a stiff move to $1.20 in the EUR/USD if he doesn’t deliver the drugs.

 

Bernanke didn’t crack open the cocaine lines yesterday, and for that, I give him a golf clap. What his pseudo sober decision did to the rest of Global Macro markets was proactively predictable:

  1. US Dollar went straight back up (+0.7% on the day, closing above an important TRADE line of $82.95 support)
  2. Gold went straight back down (down a full 1% where we covered our short position at $1603 support)
  3. US Stocks went down, then up, then back down as underperforming hedgies got whipped around, again

What happens next?

 

I have no idea. Once I get Draghi’s Italian Job, I’ll let you know. Until then I can only wait and watch for “whatever” as I score ranges, probabilities, and risk managed scenarios – like I do every morning.

 

On that front, here’s a morning dump for you in US markets:

  1. US Dollar Index remains in a Bullish Formation (bullish on all 3 of our risk management durations, TRADE/TREND/TAIL)
  2. US Treasury Yields (10yr) remain in a Bearish Formation (bearish on all 3 of our risk management durations)
  3. US Treasury Yield Spread (10s minus 2s) = +129bps wide and continues to compress; very bearish economic signal
  4. SP500 immediate-term risk range of 1363-1386, with its intermediate-term TREND line right in the middle of that (1376)
  5. US Equity Volatility (VIX) remains in a Bullish Formation with intermediate-term TREND support = $17.62
  6. US Equity Volume studies are as nasty as I have ever measured them in my career (+16% on yesterday’s down move)
  7. Russell2000 negatively diverging from SP500, already bearish TRADE and TREND, closing down -1.7% yesterday
  8. S&P Sector Studies continue to flag on 3 Sectors (out of the 9 majors) as buys (Healthcare, Consumer Staples, Utilities)
  9. S&P Sectors recently snapping both TRADE and TREND lines = Consumer Discretionary, Transports, and Basic Materials
  10. Energy (which is asset price inflation, not growth) continues to be the best performer on a 1-month duration

On that last point, Keynesian central planners get their tighty whities in a bunch. I think that’s primarily because it implies that they themselves are perpetuating #GrowthSlowing by infusing a market wedgie of expectations that jams commodity prices higher.

 

#tighty #whitie #wedgie – none of those words spell checked on my PC, weird.

 

What might also seem a bit odd to the beggars for more of what isn’t working is what’s going on in the rest of the world this morning:

  1. Chinese Stocks, after having 1 up day, went straight back down last night (Bearish Formation, down -14% since May)
  2. Japanese Equities remain no volume/no bid (Bearish Formation, Nikkei225 down -16% since March)
  3. South Korean Equities (KOSPI, great leading indicator) backed off TRADE resistance of 1881 again last night

Oh, right – the rest of the world, per the Fed and ECB, is really the West. Damn them people in the East who eat inflated food and consume derivatives of $106/barrel Brent Oil.

 

As we beg the Italian for more of what the British are chastising Chinese swimmers for using, let’s get a medal count:

  1. China = 30 medals
  2. USA = 29 medals
  3. Japan = 17 medals

Not sure what that means for Global Macro other than China is not Japan.

 

In the spirit of winning, let’s just play the game that’s in front of us out there today. At the end of the day, Market Slavery to the next central plan or not, we can fight this for a lot longer than our overlords can remain in office.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1590-1624, $105.29-107.84, $82.35-84.03, $1.20-1.23, 6403-6736, and 1363-1386, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Market Slavery - Chart of the Day

 

Market Slavery - Virtual Portfolio



Follow The Lightning

“I follow the lightning, And draw near to the place that it strikes.”

-Navajo Chant

 

Now I know that a lot of our clients want to talk about what consensus versus contrarian thinking is, in this no-volume marketplace, but I’m thinking they’d have a tough time advising their kids to go hard core contrarian like the early 19th century Navajos did.

 

Admittedly, I am developing a Darwinian confirmation bias in my reading list this summer as I delve into more Native American history with a book I started reading this week titled Blood and Thunder – “The epic story of Kit Carson and the Conquest of the American West.”

 

Whether it was the ability of the Navajo and Comanche tribes to adapt and survive the late 18th and early 19th centuries, or it’s what you are staring at on your screen this performance chasing morning, our goals remain common in human nature; evolve or die.

 

Back to the Global Macro Grind

 

Buy stocks or bonds?

 

Rarely can I time that question as critically as I’ll timestamp it this morning. Yes, these are the thralls of August. But Mr Macro Market couldn’t care less about our summer vacations. Timing matters right here and now, big time.

 

Timing was especially important in answering this same basic asset allocation question in the middle of March 2012 (see Darius Dale’s Chart of the Day): 

  1. Stocks wouldn’t go down
  2. Bonds wouldn’t go up
  3. Volatility went away 

In fact, by the time the VIX hit 14.26 on March 26th (the Russell2000 topped for 2012 on the same day at 846, +5.2% higher than where it is today), there was a massive consensus (both buy and sell side)  that “growth was back” and “earnings are great.”

 

Fast forward to June… and US stocks were gasping for air in the middle of a double-digit drawdown (Russell2000 and SP500 down -13% and -10% from their late March highs) as US Treasuries put on a massive move to the upside (10yr yield dropped -42%, from 2.4% to 1.4%).

 

What drove the correct answer to the stocks vs bonds question?

 

Global #GrowthSlowing. Period.

 

What will get you to the correct answer for the next 1-3 months, from here?

 

Follow The Lightning.

 

The most abysmal volume and volatility readings I have ever recorded in my US Equity model aside, there are 2 basic realities that both bulls and bears have to deal with this morning: 

  1. US stocks are making both intermediate and long-term lower-highs
  2. US bonds are making both intermediate and long-term higher-lows 

In other words, if you believe Growth is going to improve from here, you buy stocks. If you’re more confident (like we and the data are) on #GrowthSlowing, you buy bonds.

 

Our predictive tracking algorithm (the one that called for #GrowthSlowing when few did in March), which is a multi-factor, multi-duration model, is telling us that this is a fairly straightforward call to make because:

 

A)     Oil prices are up +32% (Brent) from the June low (that slows growth)

B)      Corporate Revenue growth’s slope is as weak as it has been, globally, since Q308

C)      Chinese Growth continues to surprise on the downside

 

Chinese what? Yes, while I suppose you could say that China’s Foreign Direct Investment (FDI) print this morning of -9% year-over-year was better than India’s Export growth tanking to -15% year-over-year earlier this week, we highly suggest you take China’s word for it:

 

“In the second half, China’s foreign trade and export situation will be more grim, there will be more difficulties, harder tasks, and the pressure of achieving the full-year target will be bigger…” –China Ministry of Commerce (this morning)

 

Now, before you zap me with the bull counterpoint (for stocks) to this (rate cuts, stimuli, bailouts, etc.), just remember that doing more of the same will only keep food/energy prices higher (and growth slower) for longer. That’s bullish for bonds, longer term. And our long-term TAIL risk line for growth (bond yields) remains intact at 1.94% on the US Treasury 10yr.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $111.69-116.21, $82.34-82.97, $1.22-1.24, 1.56-1.82%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Follow The Lightning - Chart of the Day

 

Follow The Lightning - Virtual Portfolio


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